corporates fitch outlook 2018: global mining -...

1/27/2018

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Fitch Outlook 2018: Global MiningCash Flows to Strengthen

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CorporatesMining / Global

Sector Outlook and Rating TrajectoryFitch’s Sector Outlook: PositiveChinese stimulus measures have supported fixed-asset investment growth since the start of2016, which has in turn led to two years of good commodity price increases. Fitch Ratingsexpects Chinese growth rates to slow in response to a tightening of credit conditions. However,the deceleration should be gradual. With growth in other economies this creates a strongbackdrop for demand in 2018. This, combined with capex cuts over the past two to three years,means that in some sub—sectors supply will struggle to keep pace with demand.

Rating Trajectory: StaticA majority of ratings in the sector have a Stable Outlook. Positive rating action is possible forcompanies over the coming year, particularly for those companies that continue to prioritise debtreduction. BHP could be a notable exception to this trend. The company has a Negative Outlookdue to a combination of the potential for a weaker operating profile and less asset diversificationfollowing the sale of its US shale assets, and the potential for a more aggressive financial policyin the future including higher shareholder distributions.

Rating Distribution Weighting: MixedLarge global diversified miners have investment-grade ratings, ranging up to ‘A+' for BHP. Thesecompanies have significant scale, wide product and geographic diversification and low costpositions. Lower-rated companies typically have smaller scale, less diversification, and highercost positions.

What to Watch- How companies choose to allocate their cash flows. Whether they are confident enough

about future growth to increase capex and/or M&A spending or whether they will deter adecision in this regard and increase dividends and share buybacks instead.

- China — transition to consumer-growth-led economy and environmental policies.- Impact of growth of electric vehicles on metals demand.- A resumption of underlying operating cost inflation.

Peter Archbold, Head of Natural Resources & Commodities“The outlook for the sector in 2018 is positive. Prices have increasedstrongly for the majority of commodities over the past year and wenow see a generally better demand/supply balance. The key industrydevelopment to watch is the impact and evolution of Chineseenvironmental policies. At the company level the main factor towatch is how companies choose to allocate their cash flows betweengrowth (capex, M&A) and shareholder returns.”

Mining- Rating ActionsI Downgrades I Upgrades

201 3 2014 201 5Source: Fitch

2016 2017

Mining - Rating Distributionissuer Count(No)

8

ONclA+ A A-

Source: Fitch

BBB+ BBB BBB- BB+ BB 33- B+ B

Fitch Outlook 2018: Global Mining

26 January 2018

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FltchRatlngs CorporatesMining / Global

Sector Forecast Global Mining Companies - Forecast Revenue and EBITDACash Flow Generation: Strong (USDbn)

— Revenue (LHS) — EBITDA (LHS) —EBITDA margln (RHS) (%)Management of cash outgoings for capex and dividends remained a priority for many mining 25o , 44companies in 2017, despite improving commodity prices. Consequently, FCF generation was 200 .. _ _ _ _ _ _ _ _ _ _ ,. _ _.. :3strong and probably reached a peak for the current cycle with dividends, share buybacks and, to 150 33a lesser extent, capex all forecast to increase in 2018. Based on our current forecasts we expect 100 g:aggregate FCF for our rated universe of companies to remain positive for the period to 2020. 50 32The key risks to this scenario are increases in capex and/or shareholder distributions. 0 30

Leverage Trend: Falling0n the back of stronger commodity prices and continued discipline on cash outgoings, manymining companies have been able to materially improve their balance sheets over the past 18-24months. For example, average FFO adjusted gross leverage for our peer group of global miningcompanies is forecast to have fallen by two turns to 2.9x at end-2017 from 4.9x at end-2015. Weexpect a further decrease to around 2.2x by year-end 2018.

Outlook Migration: A majority of mining ratings are now comfortably positioned within theirrespective ratings. Around 15% of ratings do however remain on Negative Outlook or on RatingWatch Negative. While most mining companies have considerably improved their balancesheets since the start of 2016, a continued focus on debt reduction could see more Outlooksrevised to Stable.

Potential Negative Disruption to Sector: Chinese Policies- Fitch's base case is that a reduction in Chinese growth levels as part of the move to

consumer led growth will be gradual and managed. If this is not the case then allcommodity markets and prices are likely to come under pressure.

Potential Positive Disruption to Sector: Take-Up of Electric Vehicles- Projected take-up rates for electric vehicles (and hence demand for metal), has already

2014A 2015A 2016A 2017F 2018F 2019F 2020!:Companies: BHP, Rio Tinto, Anglo American, Norilsk Nickel, Vale, Fortescue, Freeport, Codelco, First QuantumSource: Fitch, Companies

Global Mining Companies - Cash Flows and Leverage— CFO (LHS)— Dividends (LHS)—FFO Gross Leverage (RHS)

— Capex (LHS)— FCF (LHS)

AKV(USDbn)80 i

ONAQ2014A 2015A 2016A 2017F 2018F 2019F 2020F

Companies: BHP, Rio Tinto, Anglo Amenmn, Non'lsk Nickel, Vale, Fonesale, Freepon, Codelco. Fist QuantumSource: Film, Companies

Rating OutlooksI Positive/RWP I Stable I Negative/RWN

(%)10030604020

0been factored into the prices of commodities such as cobalt, nickel and copper. A higher Global mining GIObBI mining Global miningthan expected take-up rate, due possibly to government legislation or technological End-2015 End-201a Currentadvances, would be a clear positive for the commodities concerned. 50,1“.a

Fitch Outlook 2018: Global Mining Learn More at our Outlooks Site: For more information on CRU visit www.crugroup.com

26 January 2018 3 . ' 2o o

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1/27/2018

FitchRatings

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CopperFitch expects the fundamentals for refined copper to remain strong in 2018 with the physicalmarket remaining broadly balanced (CRU expects a deficit of 127,000 tonnes) and slowerdemand growth in China being compensated for by a pick-up in demand from major copperconsuming countries in the rest of the world. Fitch‘s price assumption for 2018 isUSDS,000/tonne.

The key market development to watch is the significant build-out in Chinese smelting capacitystarting in 2018 and continuing into the next decade. This is consistent with the Chinesegovernment's desire to be self-sufficient in key metals. A significant amount of new smeltercapacity will be commissioned already in 2018. CRU forecasts are for 900,000 tonnes of newfirm and 450,000 tonnes of probable capacity to commence production in 2018 with a further1.1m tonnes of firm/probable capacity and 650,000 tonnes of possible capacity by 2021.

Chinese cathode imports will steadily fall as domestic production grows. While not reflected incurrent trading, we expect the copper concentrate market to move into deficit in 2018 by around100,000 tonnes with a larger deficit In 2019. On the supply side, we expect limited new minesupply over the next few years and output from currently operating mines is likely to fall due tograde declines. As a result, we expect that the deficit in the copper concentrate market over2018-2020 will translate to into large deficits in the refined copper market atter 2020.

Potential Positive Price Drivers- Higher than expected level of supply disruptions from strikes (the industry in 2018 has a

higher than average level of wage agreements due to be renegotiated).. As with several other commodity sectors (see the section below for nickel), future copper

demand and prices will benefit from the growth in electric vehicle demand. The contributionto growth will be lower than for nickel and cobalt, but electric vehicle demand will be asignificant factor in the physical deficits expected in the copper market after 2020. Batterypowered vehicles contain around four times as much copper as a conventional medium-sizecar (around 80kg versus around 20kg).

Potential Negative Price Drivers

Chinese copper growth slows faster than currently expected.- Much lower than average/expected supply disruptions in 2018.


CRU Copper - Production, Consumption, Market Balance (000 tonnes)2017 2018 2019 2020

Global refined copper production 22,940 23,317 23,976 24,277

Global refined copper consumption 22,761 23,444 23,955 24,395Global refined copper balancea 179 >127 21 —1 19China refined copper balancea 211 —30 7 -134

3Adjusted for China SRB and Korean PPS stocks and marketretated cutbacks. Source: CRU, LME, SHFE

New Copper Mine Production - Status: Probable and Firm(2018-2021)(kt) l2018 .2019 '2020

Cobre

Panama

(Petaquilla)Grasberg Block

Cave

Toquepala Expansion5Other

2018

Kansanshi Expansion

SS

Qulong

aOther

2019

Chuquicamata UndergroundYulong

Phase

ll

8Other

2020

Spence

-

Sulphides TiaMaria

2Other

2021

aOther includes mine with production below 100mSource: CRU, Company reports, Fitch; kt = thousand tonnes

Copper Market Heading for Large Deficits Visible Stocks Expected to Fall SharplyGlobal refined copper balance Global total estimated stocks

(kt) (kt)250 2,000

0 I 1,600

1,200250

800"500 400

J50 02014 2015 2013f 2020f 202f 2014 2016 2018f 2020f 2022f

Kt = thousand tonnes kl = thousand tonnesSource: CRU Source: CRU, LME


26 January 2018

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Aluminium CRU Aluminium - Production, Consumption, Market Balance (000 tonnes)

Al ' ' 'd t I d d 0 iii 0 t I ' f bl f 2018 d rt

20" 2013 2019 2020uminium In us ry supp y an eman n amen as remain avoura e or an suppo Global primary aluminium production 63,285 66,105 69,324 71372

our expectation of higher average prices compared to the 2017 level of USD1,968/tonne. Prices Global primary aluminium 63 589 66 431 69 097 71 175are however likely to consolidate at levels around USD2,200/tonne rather than push sustainably consumption

' V I ,

higher. This reflects a combination of an amply supplied market, increasing Chinese stocks, post Global primary aluminium balance -304 -325 227 197winteraclosure restarts, slowing demand from the Chinese construction sector and that cost input China primary aluminium balancea 1,563 1,245 1,241 678

prices are likely to peak during the year. aAdjusted fornet primary trade. Source: CRU, LME, SHFE

Global consumption growth is likely to remain sound in 2018 at around 4.0°/o-4.5% year-on-yearcompared to 5.7% in 2017. The key development is however coming on the supply side withcontinuing evidence that the Chinese state will actively control future smelter production growth.CRU estimates that annual production growth in China will slow to 5% in 2018 and 2019 andfurther decrease from 2020-2022. The net result is a reduced market surplus in China of around1.2m tonnes in 2018 with further reductions expected out to 2020. Outside China, the aluminiummarket has been in physical deficit since 2012 and this will continue in 2018. We expect thatexports from China will increase from 2H18, although not at a level to cover the ex-China deficit.

Other Factors to Watch in 2018- Chinese winter cuts. Production cuts to reduce pollution will support prices until March 2018.

CRU estimates that 2.1m tonnes of smelting capacity will be closed from 15 November 2017to 15 March 2018. The rate at which smelters restart over March/April will be important.

- Cost inflation. Aluminium raw material costs including alumina, carbon anodes, calcinedcoke and caustic soda have materially increased over the past year due to environmentallyled closures in China. Costs for several of these inputs are likely to peak in 2018, but theywill continue to support prices at least during the first half of the year.

Potential Positive Price Drivers- Higher than expected raw material costs, particularly for alumina, supporting prices.

Potential Negative Price Drivers. Current market prices sit well above 90th percentile business costs as forecast by CRU in

2018 and could encourage additional production or a higher than assumed level of smelterrestarts.

. Sharper than expected slowdown in Chinese construction demand.

Chinese Aluminium Export ArbitragesI Fake semis export arbitrage

(USD/t)300200100

0-100—200—300—400—500—600

I Primary export arbitrage

re‘_ON1017

is;3017

e4017

m1018 201a 3019 401a 1019 2019 3019 4019

Source: CRU, L F

Aluminium Raw Material Prices SpikeIndex, Jan 17 = 100

—CRU Alumina Price Index—Carbon anode

Coal tar pitch—Calcined coke

200

160 , .

120"-—/80'

40i; l\ l\ h- i; r; i: h— l\E n a a > r: j on a ‘0‘_J Lari 2 < E 3) _’ 2 $ 0

Source: CRU

Aluminium Market BalanceBalance after Chinese primary net exports

(kt) I China balance I Ex. China balance

hhhnmmoooommmm

000000000000x—Nmfi’eVx—NWV

Source: CRU; kt = thousand tonnes

Driving Aluminium Smelting Costs HigherGlobal 90th percential aluminium smelting costs

(USD/t)2,600

2,400\2.200

2,000 \1,800 \ /1,600 —\,41,400

2012 2013 2014 2015 2016 2017Source:CRU


26 January 2018 :l

Learn More at our Outlooks Site: For more information visit CRU Aluminium4



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Nickel CRU Nickel- Production, Consumption, Market Balance (000 tonnes)3

LME nickel prices have increased by over 40% since mid-2017 largely due to a more positive ~ - 2°17 2°13 2°19 202°_ . ' ‘ . _ Global nickel production 2,025 2,172 2,266 2,360

marketsentiment

(particularlyaround future demand from electric vehicles) and higher global Global nickel consumption 2.109 2,219 2.330 2,404Sta'mess Stee' Pr°d“°t'°”- Global nickel balance ~84 47 .54 -44

China nickel balance -542 »524 —572 -619What makes the extent of the price appreciation somewhat surprising is that 2H17 has also seen a . _ _an increasing level of ore export quotas being approved by the lndonesian government. To date comamed ”cm" some CRU' LME

ore export quotas totalling over 20.0M wet metric tonnes (WMT) have been approved, whichequates to 215,000 tonnes on a nickel-contained basis (initial government indications were thatapprovals would be limited to 5.0-5.0m WMT). Over half the volume was approved in 4017.

Nonetheless. there remains uncertainty regarding the scale of exports in 2018. CRU's currentassumption is that lndonesia exports 13.0m WMT in 2018 resulting in Chinese nickel pig iron(NPI) production rising to 500,000 tonnes in 2018 compared to 397,000 tonnes in 2017.

The level of Chinese NPI production is uncertain, but broader fundamentals for the nickel marketremain positive in 2018 with upward revisions to stainless steel production globally. while nickelmine supply has underperfonned forecasts. The market is expected to remain in physical deficitby around 50,000 tonnes in 2018 and out towards 2020.

Potential Positive Price Drivers- Near-term upside could come from stronger than expected stainless steel production.. Longer-term price increases could come from a tack of new mine supply with current spot

prices of around USD12.500/tonne not sufficient to incentivise new supply, and demand

ROW to Play a Bigger Role in Stainless Batteries Will Drive Nonstainless DemandGrowth Nickel consumption in the battery sectorYoy change in stainless steel production

kt(kt) I China I ROW (2:0 I EV I EX‘EV

@28833283312831:000 , 100

500o 50

—500 7 ,2 E r: a: as 5 2: N 0g g E 8 8 S S S 2016 20171 20181‘ 20191 20201 2021f

N N N N N N

Source: CRU Source: CRU

Nickel Pig Iron to Fuel Supply Growth Total Nickel Demand Will AccelerateGlobal nickel production in 201 8

Yo chan ein lobal rima nickel consum tion(kt) IGlobal production ex—NPI IGlobalNPl y g g p ry p

from the electric vehicle battery sector. 3,000 (98,0)Potential Negative Price Drivers 2,500 7. Stronger than expected Indonesian ore exports/Chinese NPI production. 21000 5

1,500 51,000 g

500 20 1

52 “r: '66 '63 '5 2: “ti 0O E E 6 S 8 SN N N N N N N 2016 2017f 2018f 2019f 2020f 2021f 2022fNPI - Nickel pig iron. Source: CRU Source: CRU

Fitch Outlook 2018: Global Mining Learn More at our Outlooks Site: For more information visit CRU Nickel

26 January 2018 :‘l . ' 5o o



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FitchRatings

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Zinc2017 saw the zinc market evolve largely as expected with the exhaustion of concentrate stocksin the middle of the year resulting in smelter production cuts in China and the subsequentdrawdown of refined metal stocks. This saw a record physical deficit and a sharp run-up inprices. Following on from this 2018 is shaping up to be another strong year for zinc prices,although one in which we are also likely to see prices pass their peak.

Zinc prices are likely to find support in the early months of 2018 due to tightness in the refinedmarket caused by a lack of available feed for Chinese smelters. Thereafter however we see newmine supply together with the restart of idled capacity resulting in an increase in concentratestocks, which will build up sharply from 2019 onwards. This together with some price inducedrationing (particularly in the zinc chemicals and die—casting sectors) starting by 2H18 willprobably see a moderation in refined metal prices. A lower rate of smelter capacity growth willhowever keep the refined market relatively tight and prices at historically high levels out to 2020.

In December 2017 Glencore provided an update on the restart of the 500,000 tonnes per annumof zinc mine production it had idled over two years before. The company announced the restartof operations at the Lady Loretta mine at Mt Isa in Queensland as well as brownfield expansionsat Zhairem in Kazakhstan and Contonga in Peru. Overall, however, Glencore‘s attributable zincproduction in 2018 will actually decline to 1,090kt (+/- 30kt). While the rate at which Glencorerestarts capacity is still an important factor the industry, arguably the bigger issue over a four— tofive-year horizon is the rate of new mine supply growth, particularly from China. CRU estimatesthat China could add up to 960,000 tonnes of capacity from new mines and expansions by 2022.

Potential Positive Price DriversRefined zinc demand remains stable rather than declining as expected in 2018/2019.

Potential Negative Price Drivers. Stronger than expected smelter capacity growth in China.- Glencore restarts more mine capacity during 2018 than currently planned.- Chinese auto sales slow faster than expected.


Selected CRU Zinc Price and Market Forecasts2017 2018 2019 2020

PricesLME cash (USD/t) 2,885 3,530 2,890 3,125LME 3-month (USDIt) 2,884 3,513 2,895 3,140Production, Consumption, Market Balance (000 tonnes)Global refined zinc production 13,250 13,975 14,415 14,675

Global refined Zinc consumption 14,005 14,270 14,400 14,690Global refined zinc balancea —755 -195 165 -15China refined zinc balancea —400 725 125 1753 Adjusted for Chinese government sales. Source: CRU, LME

Metal Stocks Have Been Falling Rapidly CRU Expects Demand Growth toCumulative metal stock surplus Decelerate(Mt) I Metal I Concentrate Global zinc consumption growth3.5 (%l30 3.0275 2.5

20 2.01.5 1.51.0 100.5 0'500 00

a) up on c) x— ‘— N (0 tr V In no [-'

C) o o ‘— 1— ‘— ‘— ‘— ‘— ‘— ‘— <— ‘—ooooooooooooe '05‘— V m N ‘— V °" N ‘— V ‘2 N ‘— 2014 2016 2013i 20201 2022fSource. CRU, LME; Mt: million tonnes Source: CRU

Mine Production to Grow Faster thanSmeltersGlobal zinc mine production and smelter capacity growth

Leading to Large Concentrate SurplusesGlobal market balance (contained zinc)

, M taIb | C0 tr t b |(‘15) lMine growth ISmelter capacrty growth 10830

I e aance I ncen a e aance

1” 7505005250

g 0-250

-5 -500~750

-10 .10002014 2016 20181 2020f 20221 2014 2015 2018f 2020f 2022f

Source: CRU Source: CRU; kt: thousand tonnes


26 January 2018

Learn More at our Outlooks Site: For more information visit CRU Zinc6



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1/27/2018

FitchRatings

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Iron OreFitch expects market prices for iron ore to decline below USD60/tonne during 2018 from anaverage of around USD75 in 2017. This outlook reflects our expectation of flat demand in Chinacombined with around 50 million tonnes of new capacity entering the market. The main sourcesof new supply are the ramp-up of Roy Hill and Silvergrass in Australia and Vale's S110 mine.We continue to expect that the major producers will be disciplined in bringing new supply into themarket in order to try and balance demand, support prices and maximise profits.

In China a combination of improved mill profitability together with the state's Blue Skies policyhas incentivised mills to use more efficient, higher—grade ore. As result, the pricing discountbetween 58% and 62% iron grades has increased at present to around 40% (compared to amore normal level of around 10%). This trend benefits Rio Tinto, BHP and Vale, and worksagainst larger producers of lower-grade ores such as Fortescue (FMG). Our expectation is thatthe pricing gap will narrow once the winter heating season is finished, given the cost benefit thatmills can realise from using lower-grade material. It is however possible that a winter seasonincrease in the quality discount may become a permanent feature of the iron ore market.

After several years in which producers have been able to reduce operating costs, 2018 is likelyto see a resumption of underlying operating cost inflation in the industry. CRU is forecasting costinflation across the industry of up to 3.8% in 2018. Included in this forecast is the part reversal ofprevious FX related gains. One exception to this trend could be in Brazil where political riskduring the 2018 election cycle could lead to a weaker Brazilian real, which would be of benefit toVale’s costs.

Potential Positive Price Drivers- Higher than currently forecast steel production in China. The likelihood of this however is

limited by the rigorous manner in which winter production cuts are being managed and thatcapacity utilisation rates are already at a high level.

- Slower than expected ramp-up at new capacity.

Potential Negative Price Drivers- Major producers move back to focusing on market share rather than emphasising value and

profitability.


CRU Iron Ore Import, Export and Production Forecasts

2017 201 B 2019 2020Imports, exports (m tonnes)Global iron ore imports 1,440 1,461 1,468 1,472Australian iron ore exports 890 904 911 908Brazilian iron ore exports 368 409 440 456

South African iron ore exports 62 60 60 60

Chinese production, imports (m tonnes)Chinese iron ore mined productions 224 205 200 183Chinese iron ore import penetration”(%) 0.82 0.83 0.83 0.85a Chinese iron ore production includes production of fines and lump. b Import penetration represents imports as aproportion of consumptionSource: CRU

BreakevenPrice Growth in Seaborn Supply(use/t) 'R'°T'”‘° 'BHP (mtonnes) lTotal lSupplyfall

I FMG IVale (fines only) 20050 ,

15040

100 730

5020

010 _50

0 s2 3 s s 1: <2 2 8 a2H15 2H16 3016 40161017 2017 3 3 8 3 8 8 8 a 8

Source: CRU Source: CRU

China Crude Steel Production Global Iron Ore Demand("1100095) (m tonnes) IFines lPeIlets ILumps900 2,500890380 2,000

370 1,500

860 1,000

350 500840 0

232931199$82§ mwhcomg§gggg333383333 888888833885011759? CRU Source: CRU


26 January 2018 :

Learn More at our Outlooks Site: For more information visit CRU Steelmaking Raw Materials

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- CRU Metallurgical Coal — Consumption, Trade, Chinese Production (m tonnes)

rtehallurglfal (3:33] ' I I ' 'II t' t d t ' 2018 b d dd't' l 2°17 2°18 2°19 2°20to expecs me a urglcacoa prices

WI conInue‘o mo

era e In aseon

a“one Global metallurgical coal consumption 1 120 1 129 1 129 1 129

supply to market. Factors behind this Include the ccntInued Impact from the relaxation of Chlna’s .‘ ’ ‘ ‘

276-day rule, the recovery from cyclone Debbie, and additional supply from other producers. The Global metallurgical coal ”ports 340 345 346 351sharp increase in metallurgical coal prices beginning in the second half of 2016 was driven by Australian metallUfQical 503' EXDOnS 181 192 198 203production cuts in China exacerbated by the exit of loss-making North American production from Chinese metallurgical coal production 666 666 662 656the market. Chinesemetallurgicai coal import 104 94 8.8 8.4

penetration (%)Demand in 2018 will be influenced by environmentally led winter production cuts to Chinese ammo” penemion ,emesemsimpons asapmpomon ofconsumpflm SourcefiRUsteel production from November 2017 through to March 2018, and slower steel demand from theproperty sector. This is expected to result in Chinese metallurgical coal imports reverting to 2016levels in 2018. We expect metallurgical coal imports in India, Japan and Korea to grow in the lowto mid-single digits in 2018, absorbing increased Australian production and resulting indisplacement of US swing production. China's eftorts to cut air pollution favours premiummetallurgical coal grades. Fitch's price assumption for hard coking coal in 2018 is USD135/tonnecompared to an average of around USD175/tonne in 2017.

Profits and cash flows for metallurgical coal producers surged following the implementation ofChina's 276-day rule and have supported investments to increase production from existingmines. With Fitch's expectation that long-term prices moderate to USD110/tonne, some USproduction capacity is likely to exit the seabome market.

Potential Positive Price Drivers

Chinese metallurgical coal production is lower than expected due to tighter safety andenvironmental regulations and enforcement.

Chinese steel production is higher than expected due to stimulus measures.

Major disruptions to supply (eg. a recurrence of flooding in Queensland).


Lower than expected steel production in China due to a weaker than forecast slowdown inthe domestic property market.

Swing producers sustain or grow volumes to generate incremental cash flow in the face offalling prices.

Seabome Metallurgical Coal Market Balance 2018(m tonnes)2015 7— ,i

5

l0—5

Australia Supply OtherSupply Fall in Supply Fall in Chinese Increase in Market BalanceGrowth Growth (Primarily Demand Demand

US Exports) ex-ChinaSource: CRU

EBITDA and Price Migration for Key Metallurgical Coal Producers— BHP Billiton (LHS) — Teck Resources (LHS) — Anglo American plc (LHS)— Glencore plc (LHS) -Peabody (LHS) —Average Price (RHS)

(USDm) (USD/tonne)5,000 1804,000 1503,000 1202,000 901,000 60

0 30—1,000 0

1 H15Source: Company information

1H16 1H1?


26 January 2018



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FitchRatings

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Thermal CoalThermal coal markets remain Asia-driven with the strength seen in prices in recent months dueto strong Chinese coal demand during the summer, lower supply as a result of an increasedfocus on improving coal mine safety, and temporary production problems in some exportingcountries. Fitch believes the thermal coal market will remain well supplied over the next coupleof years as key consuming countries including China and India meet demand with increaseddomestic production, and major exporting countries Indonesia and Australia ramp up productionfollowing the recovery in prices from the lows of early 2016. Coal consumption growth willhowever be modest amid increasing adoption of non-fossil fuels, improved energy efficiency,and policies aimed at curbing pollution in major consuming countries.

Volatile coal prices have prompted the Chinese government to issue pricing stabilisation policies inorder to help to balance the interests of coal and electricity producers. The government has setthree ranges of price levels with corresponding supply control mechanisms since early 2017 andhas continued to encourage vertical integration between coal and power companies. In Indonesia,the state-owned power utility Perusahaan Listrik Negara proposed setting domestic coal prices ona cost plus fixed margin model with support from the coal mining association, although thegovernment later rejected the proposal in September 2017 in an attempt to boost utility efficiency.

Fitch’s commodity price deck assumes the Newcastle benchmark to moderate to USDTZItonne in2018, dropping further to USD67/tonne in 2019 and thereafter. The long-tenn price of USDG7/tonneis roughly equivalent to the lower end of the Chinese government's target price range that isviewed as economically feasible for both coal mining and power generation companies.

Potential Positive Price Drivers. Stronger than expected Chinese and Indian power demand driven by economic growth or

extreme weather conditions.A combination of slower capacity additions (particularly for renewables) and/or continuationof supply dlsruptions in major coal producing countries.


Reduction in renewable energy costs driven by technological breakthroughs and/orgovernment policies.Significant coal capacity additions in major producing countries, though we do not view thisas a likely risk given the negative sentiment regarding coal and the increasing unwillingnessof lenders to approve finance in the sector.


Selected CRU Thermal Coal Price and Market Forecasts201 7 2018 2019 2020 2021

PricesFOB Newcastle spota (USDIt) 69.9 65.0 69.0 71.0 71.5YoY change (‘16) 28 10 6.2 2.9 0.7Thermal Coal Demand (million tonnes)Demand from electncity generation 4,161 4,215 4,295 4,379 4,463Demand from cement production 587 600 611 614 620Demand from other industrial uses 1 ,595 1,515 1,493 1,464 1,479

35,500 kcallkg. Source: CRU

Seaborne Demand to Fall in 2018Seaborne coal imports (LHS), 5,500 kcal CFR China

CRU Expects Lower Seaborne Pricesin 201890th percentile of seabome cost curve and prices, — China — EU285,000 “53' — 90m percentile —FOB Australia — Other N» -Other 599190(:JOSOD/t) —CFR Europe (YOY Mt)

—'Price (RHS) (USD/t)50 , , 7 , 80

8060 0 70

40_50 60

200 —100 501016 3016 1Q17 3Q17 1018 3018 2015 2016 2017 2013

Source: C U Source: CRUHigh-Cost Chinese Producers Under PressureY: Chinese thermal coal cost. 6,000 kcal, 2018 FOB USDItX: Contestable Chinese thermal coal production, 2018, Mt

1 10100908070605040

0Source: CRU

100 200 300 400 500 600 700 800


26 January 2018



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GoldBroad-based and solid investment demand, modest new mine supply, consistent net producerde-hedging since the third quarter of 2016, and scrap supply stabilising at weaker than historicallevels provide support at the USD1,200/oz. level, which is Fitch‘s price assumption for 2018.Fitch believes continued investment demand is supported by low real interest rates, steadygrowth expectations in developed and emerging markets, and a generally stable US dollar.

CRU expects mine production to remain relatively flat in 2018 with 3,088 tonnes of productioncompared to a forecast 3,070 tonnes in 2017. Strong inflows of investment capital areanticipated to continue into 2018 as geopolitical uncertainty remains high. Central bank holdingsare expected to also remain flat assuming China continues to remain content with its currentreserve base. The demand side should see additional improvement in 2018 coming from astrong recovery in jewellery offtake in India and additional demand growth for gold coins fromChina and Turkey. This will aid in decreasing the current balance surplus year-over-year.

Fitch anticipates an industry-wide trend of producers focusing on six to eight core minesproducing three to four million ounces annually. Many of the projects coming online over the nextfive years are extension projects at low-cost mines or new projects with similar cost outlooks.Long-term guidance for the largest producers supports this outlook, which should positioncompanies to have better financial and operational flexibility in times of lower prices.

Potential Positive Price Drivers

Limited supply growth clue to mine closures.

Additional rise in geopolitical concerns.

Chinese central bank purchases exceed expectations.


Mine production increases in excess of company guidance.

Significant reduction in geopolitical tensions.

Corp0rate3Mining / Global

Selected CRU Gold Production and Gold Holding Forecasts

2015 2016 2017 2018 2019 2020Gold mine production (tonnes)China 450 454 431 414 406 410Australia 276 288 294 295 285 272Russia 252 254 259 269 278 283USA 214 220 217 211 204 197Canada 153 163 165 166 165 163Central bank gold holdings (tonnes)

Global total holdings 32,106 32,723 33,073 33,398 33,678 33,908Net change year on year 730 617 350 325 280 230

Source: CRU, LME

Jewellery Demand to Grow in 2018 Lower Scrap Supply Offset by OfficialYear—on-year change in fabrication demand Net Sales I Scrap supply

_ ‘ (tonnes) I Official net sales(tonnes) I Other Fabrication IJewellery 1 500200

I Electrical ICoins ‘7

1,000100

0 500

—100 o-200 —500—300400 ~1 .000

2016 2017 2018 2019 2020 2021Source: CRU

2016 2017 2018 2019 2020 2021Source:CRU

Aggregate Cash Flow Breakdown - Fitch Rated Gold CompaniesICash flow from operations (Fitch-defined) lCapital expenditureI Dividends I Net acqusitionsldivestitures

(USDbn) INet equity proceeds2010

2012 2013 2014 2015 2016 2017f 2018f 20191

Source: Company Information, FltCh


26 January 2018



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Key Rating Triggers for Select Issuers on Watch, Positive or Negative

Issuer IDRBHP Billiton Pic A+

Compania Minera BBB—Milpo S_A_A_

Freeport—McMoRan BB+inc.

Nord Gold SE BB-

Polyus Gold BB-

Teck Resources Ltd, BB+

Source: Fitch

FFO AdjustedLeverage 201 SF

OutlooldWatch ()0Negative 1 .7

Negative 1.1

Negative 2.0

Positive 2.5

Positive 3.2

Positive 24

Key Downgrade Trigger Key Upgrade Trigger

Weaker operating performance, large debt~funded acquisitions or (For a stabilisation of Outlook) A conservative financial profileincreased shareholder returns resulting in FFO adjusted gross including FFO adjusted gross leverage falling towards 1.5x.leverage remaining above 1.5x for a sustained period, further sustained FCF margin above 3% with funds used forweakness in operating performance resulting in EBlTDA margin being strengthening the balance sheet (only change in Outlookbelow 40%. possible).

Milpo's ratings are linked to the ratings of Votorantim S_A. (VSA, BBB-lNegative) because of its ownership, strong operational and legalties. and shared management, based on Fitch's parent and subsidiary linkage criteria. Should the current level of operational and legalties change as a result of VSA divesting its ownership stake in Milpo, then a rating action based on Milpo's standalone credit profile couldfollow,

Failure to gain approval to export concentrate on reasonable terms Extension of the contract of work or attaining a stabilityfrom Indonesia, FFO adjusted leverage staying above 3.7x on a agreement in lndonesia and expectation of FFO adjustedsustained basis and negative FCF leverage below 3.3x on a sustained basis.

EBlTDA margin below 20% on a continuing basis. Strengthening of the company's operational profile throughsuccessful commissioning and ramp—up of the Gross project

Failure to deleverage in line with Fflch's expectations, resulting in FFO together with FFO adjusted gross leverage being sustainedleverage above 3.0x on a sustained basis. below 20.

Positive FCF on a sustained basis.

EBlTDA margin above 30% on a sustained basis.Higher—than—expected dividend payments or other shareholder Expected FFO adjusted gross leverage below 3.0x by end—2019.distributions leading to weaker liquidity and sustained high leverage.FFO adjusted gross leverage above 4.0x or FFO adjusted net leverage FFO adjusted net leverage below 2.5x by end~2019.above 3.0): sustained till ende2019.

Sustained positive FCF generation.Sustained negative FCF generation.

Reduced economics of the Fort Hills project. FFO adjusted leverage expected to be sustained below 2.5xassuming mid—cycle commodity prices.

Prolonged periods of negative FCF that are not supported by assetsales. Commitment to fund projects in a balanced fashion to minimise a

potential reduction in liquidity,Expectation that FFO adjusted leverage is sustained above 3.5::assuming mid-cycle commodity prices.


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Outlooks

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Related Research

|Global Economic Outlook (4 December 2017)

Analysts

Peter Archbold, CFASenior Director+44 20 3530 [email protected]

Jenny HuangDirector4- 86 21 5097 3101Mnymmmgsm

Monica BonarSenior Director+1 212 908 [email protected]

Phillip WrennAssociate Director+1 _312 368 2075phllllpmreafilchrafingscum

Laura ZhaiDirector+852 2263 [email protected]

PatricktHughesAnal+1 312 368 5456palfidchughesQflchmmwm

CRU ResearchAluminium

CWNickel

Zinc

Coal

Shel

Gold and Precious Metals

Iran 613 (31mmW}


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‘that Fitch is ._ ‘ ' ‘ , and

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rating or a report. The rating does not address the risk of loss due to risks other than credit risk unless such riskis specifically mentioned. Fitchis not engagedin the alter or sale of any security. All Fitch reports have shared authorship Individuals identified in a Fitch report were involved in,but are not solely responsible for. the opinions stated therein The Individuals are named for contact proposes only. A report providing a Fitch ratingI5 neither a prospectus nor a substitute tor the verifiedand to ' ‘ by the issuer and its agents in connectionWith the sale of the securities Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch Fitch does not provide investment advice of any sort Ratings are not a recommendation to buy. sell or hold any security. Ratings do not comment on the adequacy ofmarket price the suitability of any security tor a particular investor or the tax—exempt nature or taxabiiiiy of payments made in respect to any secunty Fitch receives fees fromissuers insurers, guarantors other obligors and underwriters for rating securities Such tea generally vary fromUS$1 000 to US$750000 (or the applicable currency equivalent) per issue In certain cases, Fitch will rate all or a number ofissues issued by a particularissuer or insured or guaranteed by a particularinsurer or guarantor. for a singte annual fee Such fees are expected to vary fromUS$10 000 to U851500.000 (or the The ' or ‘ ' ' of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in comedian with any registration statement filed under the United States securities laws,the Financial Services and Markets Act of 2000 of the United lungldom or the secunties laws of any particular jurisdiction Due to the relative efficiency of electronic publishing and distribution Fitch research may be available to electronic subscribers up to three days earner than to omitsubscribers

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